The most recent acquisition, which closed at the end of March, was more than $2.2 billion of Energy Transfer Partners' assets. This acquisition will probably stretch the company's balance sheet for a while, but the company expects to wind down capital spending after this acquisition and get back to a target debt range of a rather reasonable debt-to-EBITDA ratio of 4.0 to 4.5.
Another reason Sunoco might be backing away from the acquisition front for a bit is that Energy Transfer Partners is basically out of retail and marketing assets to drop down to Sunoco, and the company will now need to pivot to a new growth strategy.
Plenty of options
There are two things you need to consider with the retail and marketing aspect of the oil business: It's a very mature market, and it's very fragmented. Typically when you see a gas station, you see big name brands such as Exxon, Mobil, Chevron, or Shell. In reality, tough, most of these stations aren't actually owned by the Big Oil giants. Rather, they lease their name out to mom-and-pop organizations that may own only one or two stations. In fact, more than 70% of retail stations in the U.S. are operated by companies that own no more than 50 total locations.
Consider, too, that we've been using gasoline as our primary transportation fuel for more than a century now, and with more than 128,000 retail stations already in place across the country, overall growth for the industry will be very modest. For Sunoco to keep growing at a strong clip, it will need to take greater market share. Fortunately for Sunoco, this fragmented industry could be consolidated rather easily.
While there's ample opportunity here, the company's growth strategy would definitely change. Rather than growing with large, single transactions, the greater opportunity will lie in picking up new stores one at a time. This is a strategy that may not garner lots of headlines, but it does give the company some financial flexibility, since raising the funds for a few stations at a time is a lot easier than trying to get $2 billion all at once, as it did with its most recent purchase. In fact, smaller acquisitions could allow the company to grow through investing any excess distributable cash flow, making it less reliant on external sources of capital.
What a Fool believes
Investing in retail gas stations doesn't sound like the fastest-growing business approach, but the past year at Sunoco has been a big one for growth, having acquired all of Energy Transfer Partners' retail stations. Without it, though, the company will need to look elsewhere to find growth. After taking on such a large debt load from its recent dropdown, it wouldn't be surprising if the company elected to forgo large acquisitions and focus on improving the company's financial standing. Once growth is back on the menu, though, don't be surprised if Sunoco looks to start consolidating a very fragmented industry.
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The article Where Will Sunoco LP Get Growth From Here? originally appeared on Fool.com.
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